Legal Guide to Real Estate Investment Trusts (REITs) in Thailand

Real Estate Investment Trusts (REITs) have emerged as an attractive investment vehicle for those seeking to gain exposure to the real estate market without directly owning or managing properties. 

In Thailand, REITs are governed by a robust legal and regulatory framework that ensures transparency, investor protection, and compliance with international standards. Thailand's REIT market has grown significantly since its inception, driven by strong investor confidence and favorable regulatory frameworks.

This guide provides an in-depth overview of REITs in Thailand, their legal structure, regulations, benefits, and potential risks.

What Are Real Estate Investment Trusts (REITs)?

A REIT is a trust that owns, operates, or finances income-generating real estate. Investors can purchase units in a REIT, gaining proportional ownership in the trust's real estate portfolio. REITs offer diversification, liquidity, and professional management, making them a popular choice among retail and institutional investors.

In Thailand, REITs are regulated by the Securities and Exchange Commission (SEC) under the Securities and Exchange Act B.E. 2535 (1992), as amended, and additional regulations specific to REITs.

Evolution of REITs in Thailand

Pre-REIT Era: Property Funds

Before the introduction of REITs, Thailand's real estate investment market was dominated by Property Funds for Public Offering (PFPOs). These funds previously allowed investors to pool resources and invest in income-generating properties. However, PFPOs faced limitations, such as restrictions on leverage and lower flexibility in managing assets.

While both REITs and PFPOs serve as collective investment schemes for real estate, REITs offer distinct advantages such as higher leverage limits (up to 60% with a credit rating) and greater flexibility in acquiring and managing assets. In contrast, PFPOs were more restrictive, often limiting opportunities for investors to maximize returns.

Introduction of REITs

In 2012, the SEC introduced regulations for REITs to replace PFPOs, aligning Thailand with global practices. The REIT structure offers:

• Higher leverage limits.
• Greater flexibility in asset acquisition and management.
• Enhanced investor protection through stricter regulations.

Legal Framework Governing REITs in Thailand

Securities and Exchange Act B.E. 2535 (1992)

The Securities and Exchange Act B.E. 2535 (1992) provides the foundational legal framework for securities and investments in Thailand, including REITs. It empowers the SEC to regulate and supervise REIT activities.

Trust for Transactions in Capital Market Act B.E. 2550 (2007)

The Trust for Transactions in Capital Market Act B.E. 2550 (2007) enables the establishment of trusts, including REITs, to facilitate investment in real estate.

REIT Regulations by the SEC

The SEC has issued detailed regulations covering various aspects of REIT operations, including:

• Establishment and registration.
• Asset acquisition and management.
• Disclosure requirements.
• Rights and obligations of trustees and unitholders.

Other Relevant Laws

Land Code Act B.E. 2497 (1954): Governs land ownership and leasing, relevant to REIT asset acquisition.

Foreign Business Act B.E. 2542 (1999): Restricts foreign ownership of land, indirectly affecting REITs with foreign investors.

Establishing a REIT in Thailand

Approval and Registration

To establish a REIT, the sponsor must:

• Obtain approval from the SEC.
• Register the trust with the SEC.
• Appoint a licensed REIT manager and trustee.

Capital Requirements

• A minimum paid-up capital of THB 500 million is required.
• Funds must be raised through public offerings or private placements.

REIT Manager and Trustee

The REIT manager oversees the trust's operations and ensures compliance with regulations.

The trustee, an independent entity, safeguards investor interests and monitors the REIT manager's activities.

Establishing a REIT in Thailand involves the following steps:

• Conduct feasibility studies and identify potential assets for inclusion.
• File an application with the SEC for approval and registration.
• Engage a REIT manager and trustee, both of whom must meet SEC licensing requirements.
• Structure the public offering or private placement to raise initial capital.

Key Features of REITs in Thailand

Eligible Assets

REITs can invest in:

• Freehold or leasehold real estate.
• Infrastructure related to real estate (e.g., parking spaces, utilities).
• Real estate development projects (limited to 10% of total assets).

Leverage Limits

Thai REITs can borrow up to:

• 35% of total asset value.
• 60% of total asset value if the REIT obtains an investment-grade credit rating.

Income Distribution

REITs must distribute at least 90% of their net income to unitholders annually, ensuring consistent returns for investors.

Taxation

Foreign investors may benefit from reduced withholding tax rates on dividends based on Thailand's double tax treaties. For example, investors from some countries such as Japan or Singapore can enjoy reduced tax rates depending on the situation, boosting net returns.

• REIT income is generally tax-exempt at the trust level.
• Unitholders are taxed on dividends or capital gains based on individual circumstances.

Advantages of Investing in Thai REITs

Diversification

REITs allow investors to diversify their portfolios across various property types and locations without the need for direct ownership. Though they are reasonably closely aligned to movements in the stock market, they also provide some diversification away from the general stock market and often deliver fairly reliable dividend payments. This may have been a useful strategy with the Thai stock market underperforming in recent years.

Liquidity

Unlike traditional real estate investments, REIT units are traded on the Stock Exchange of Thailand (SET), providing liquidity to investors.

Professional Management

REITs are managed by experienced professionals, ensuring efficient asset management and compliance with legal standards.

Regulatory Oversight

The SEC's stringent regulations ensure transparency and investor protection.

Risks Associated with Thai REITs

Market Risk

REIT unit prices do behave like stocks and can fluctuate based on market conditions, affecting investment returns. Moreover, inflationary pressures and rising interest rates can erode rental yields and increase financing costs, potentially affecting the overall profitability of REITs.

Regulatory Changes

Future amendments to laws and regulations may impact REIT operations and profitability.

Foreign Ownership Restrictions

The Land Code Act imposes restrictions on foreign ownership of land, limiting the scope of REIT investments involving foreign investors.

Recent Developments in Thai REIT Regulations

Digital Transformation

The SEC has encouraged the adoption of digital technologies in REIT management, such as blockchain for transaction transparency.

Sustainable Investments

The SEC promotes environmental, social, and governance (ESG) considerations in REIT investments, aligning with global trends.

Tax Incentives

In recent years, the Thai government has introduced tax incentives to promote REIT investments, boosting their appeal to both domestic and foreign investors.

Practical Steps to Invest in Thai REITs

Research and Analysis

Assess the REIT's portfolio, management team, and financial performance.

Review the prospectus and annual reports for detailed information.

Open a Trading Account

To purchase REIT units, open a securities trading account with a licensed broker in Thailand.

Monitor and Review

Regularly monitor the performance of your REIT investments and stay informed about market trends and regulatory updates.

Investors should assess REIT performance using key metrics:

Net Asset Value (NAV): Indicates the total value of the REIT's assets minus liabilities, providing a snapshot of its financial health.

Dividend Yield: Shows the annual dividend income relative to the REIT's unit price, reflecting its income-generating potential.

Funds from Operations (FFO): Adjusts net income for non-cash expenses like depreciation, offering a clearer picture of operational performance.

Comparing Thai REITs with Global REITs

Thailand's REIT market is smaller than those of global players like the US and Singapore. While Thai REITs are limited by foreign ownership restrictions, markets like Singapore offer more liberal policies, attracting greater foreign investment. Additionally, Thai REITs typically have higher dividend payout mandates, ensuring consistent returns for investors.

Future Outlook: Potential Changes in 2025

Employee Welfare Fund Contribution

Recent discussions suggest potential changes in the legal framework, such as requiring contributions to an employee welfare fund. This change could indirectly impact REITs, particularly those managing properties with significant labor components (e.g., hotels, malls).

Enhanced ESG Regulations

The SEC may introduce stricter ESG compliance requirements for REITs, aligning with global sustainability goals.

Digital Asset Integration

With Thailand's growing interest in digital assets, REITs may incorporate tokenization for greater accessibility and liquidity.

Future Trends in Thai REITs

As the real estate sector evolves, Thai REITs are expected to integrate innovative technologies like blockchain for transaction transparency and tokenization. Additionally, the rising demand for ESG-compliant investments could lead to the creation of 'Green REITs,' focusing on sustainable properties.

REITs Thailand Legal Guide

Real Estate Investment Trusts in Thailand offer a structured, regulated, and accessible way to invest in the real estate market. By understanding the legal framework, benefits, and risks, private investors and corporations can make informed decisions and maximize returns. 

As the regulatory landscape evolves, staying updated on developments will be crucial for both investors and industry stakeholders. Therefore, we recommend connecting with real estate lawyers in Thailand to benefit from a deep and up to date understanding of your available options.